Massive payment card upgrade has mixed results in Australia

Upgrading the country's card payment system has been a slow process, which may signal similar issues for the U.S.

Despite a years-long upgrade of Australia's payment systems, fraudsters are still profiting, leaving a questionable record for a vast program to equip debit and credit cards with new security features.

For several years, Australia has been transitioning to EMV (Europay, MasterCard, Visa) payment cards, which have a microchip with advanced cryptographic capabilities designed to deter fraud. The security changes are intended to reduce use of the black magnetic stripe on the back of the cards, which can be copied to create counterfeit ones.

The EMV system, developed in the mid-1990s, has been deployed throughout Europe and in some other countries. The system has been propelled by Visa and MasterCard in part by threats of new fraud liabilities, termed a "liability shift," for merchants and payment processors.

An investigation by IDG News Service shows the move to EMV in Australia -- a country with four major banks and a population of 22 million -- has been slow and missed self-imposed industry deadlines.

The situation could foreshadow difficulties with EMV adoption in the much-larger U.S. market, with a population of more than 300 million people and upwards of 6,000 financial institutions. While the move to EMV in Australia has resulted in declines in some kinds of fraud, other types have increased, with no clear reason why.

In June, the Australian Payments Clearing Association (APCA), a self-regulatory body that manages settlement policies between financial institutions, heralded an 18 percent drop in counterfeit card fraud in 2011.

Losses from counterfeit debit and credit cards fell from AU$40.84 million (US$42 million) in 2010 to $33.46 million in 2011, APCA said. But a closer examination of the figures, provided to APCA by banks and credit card companies, does not present such a clear-cut positive result.

Australia has a complex payment environment. There are debit and credit cards with and without the EMV microchip. Fraud figures submitted to APCA encompass payment cards issued within Australia as well as cards issued overseas and used in the country.

To arrive at the 18 percent decline, APCA combined the cost of counterfeit fraud for domestic Australian "scheme" cards, which bear the brand of companies such as MasterCard and Visa, with those of scheme payment cards issued overseas but used in Australia.

The latter category saw a notable drop in counterfeit fraud, from $28 million in 2010 down to $17 million in 2011. But fraud shot up on Australian-issued cards, from $12.9 million in 2010 to $16.4 million in 2011, the highest figure since APCA began publishing statistics six years ago.

The data suggests Australians using scheme cards in their own country face a higher risk from counterfeiting, even though those cards have the EMV microchip. Further muddying APCA's overall claim is that it doesn't know if the overseas-issued cards have only the magnetic stripe or also contain the EMV chip.

"Quite clearly they're spinning the figures the best they can," said Stephen Wilson, CEO of The Lockstep Group, a smartcard and digital identity consultancy based in Sydney. "The press releases are marketing exercises."

The U.S. Federal Reserve Bank of Atlanta noted in a January 2012 report that the decline in fraud due to EMV rollout in Australia is "more modest than the decline in counterfeit fraud in other chip-and-PIN markets."

APCA CEO Chris Hamilton admits that the figures issued by his group are not the result of a scientific study. The conclusions are in part speculative based on feedback from sources that supply APCA with statistics. "I think it's a fair statement that it's not very clear," Hamilton said.

APCA maintains the decline in other types of fraud can be attributed to the widespread deployment of chip-capable point-of-sale (POS) devices.

For example, counterfeit fraud dropped significantly on so-called "proprietary" debit cards, which are cards issued by banks that use a payment system run by a company called EFTPOS Payments Australia Limited (EPAL).

EFTPOS transactions account for 51 percent of all transactions in Australia and 80 percent of debit-card transactions, according to the organization. But those cards do not have the EMV chip, which makes the cards more vulnerable to counterfeiting. EPAL maintains that it has bolstered the security of proprietary debit cards, but would not give specific details.

EPAL has held off moving its cards to EMV, but plans over the next couple of years to begin deploying the cards. EMV is viewed as a "housekeeping" issue, according to a spokesman.

Retailers in Australia were required to have EMV-capable payment terminals in April. If they do not have those terminals, retailers can be liable for losses due to fraud, according to compliance deadlines.

But Australia's ATM fleet, which comprises more than 30,000 machines around the country, has not been upgraded so quickly.

Fitting an ATM for EMV, which can involve hardware and software upgrades, is not trivial. Making an ATM EMV-compliant is labor intensive, said Issa Keshek, who specializes in ATM EMV compliance for the company Clear2Pay and has worked with Australian banks. The machines need to undergo thousands of tests to ensure they will work with different card types.

As a result, Australian banks have stalled and allowed self-imposed deadlines to lapse. ATMs were supposed to be EMV-complaint by October 2013. The deadline was then moved forward to June 2014, but that date is still not set in stone, leaving further opportunities for fraud, Keshek said.

"By nature, the less secure country becomes a target," Keshek said. "Attackers start looking at fairly large countries that don't have the same secure infrastructure, Australia being one of them."

Commonwealth Bank, which runs more than 4,000 ATMs in Australia, said in November 2011 it would be the first to roll out ATMs that meet the EMV standard. NAB plans for its ATM fleet to be fully EMV-enabled by the end of June 2013, while ANZ said its plans were commercially sensitive but that the upgrade was a "top priority." WestPac said the majority of its ATMs are EMV-capable, but that does not necessarily mean the machines are compliant yet.

About half of the 30,000 ATMs in Australia are run by non-bank companies. The largest are First Data and Customers ATM. Customers ATM declined to comment, while First Data declined to grant an interview but said it was working toward full EMV compliance.

Typically, non-bank ATMs "are not going to be built to the same security standards as bank ATMs because they are cheaper devices," said Iain Swaine, principal consultant for e-crime prevention at Greenway Solutions, a consultancy based in the U.K. The non-bank ATMs must meet the same security standards as mandated by Visa and MasterCard, but Swaine said the devices may not be as physically secure as bank ATMs.

"This is why there is more chance of card skimmers working on them and that attackers can either physically get into the devices to put internal skimmers or to eavesdrop on the modem connection out of the back," Swaine said.

Since not all payment cards have the EMV chip in Australia, some banks may have not turned off the so-called "fallback" mechanism which allows an ATM to read data from the card's magnetic stripe. In some cases, ATMs will also read the magnetic stripe data if the chip appears faulty.

That opens a window of opportunity for fraudsters, who can take advantage of the complexity, testing ATMs to see if the devices will pay out.

If a customer's ATM card has been skimmed and a counterfeit card is made, "there's no way for a bank to tell whether a cloned magstripe or a real magstripe is used," said Steven J. Murdoch, a researcher in the Security Group of the University of Cambridge Computer Laboratory who has extensively studied EMV. "Bank records should be able to distinguish between chip and magstripe."

The situation is bad news for customers, who can bear the liability if their chip card is used fraudulently. If a chip card's magnetic stripe is cloned and a bank's ATM is configured to only read the magnetic stripe, it can be difficult for a customer to prove they did not perform a suspicious transaction.

"The bank takes even more aggressive steps to try and show you've done something wrong and that it is your malpractice," Keshek said. "You're almost guilty before proven innocent."

Banks can use other means to detect counterfeit cards. For example, if a card is used in Sydney and an hour later used to withdraw cash in Romania, it's a good sign a fraudster may be at work.

But geolocation blocks have their limits, particularly when a fraudulent transaction takes place near where a cardholder lives. "It's very difficult to catch these transactions because the fraud systems aren't tight enough," said Avivah Litan, a fraud detection expert and analyst at Gartner. "Otherwise, they start inconveniencing good customers."

Still, banks are developing better systems to catch fraud, Swaine said. The global financial system that enables card payments around the world is so technical, Wilson said, "It's amazing it ever works at all."

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